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Jackson, Inc., manufactures motorcycles. Jackson produces all the components necessary for the production of the cycles except for one (a carburetor). This component is purchased from two local suppliers: Harvey Parts and Curtis, Inc. Harvey sells the component for $64 per unit, while Curtis sells the same component for $57. Because of the lower price, Jackson purchases 75 percent of its components from Curtis. Jackson purchases the remaining 25 percent from Harvey to ensure an alternative source. The total annual demand is 160,000 carburetors. Harvey’s sales manager is pushing Jackson to purchase more of its units, arguing that its component is of much higher quality and so should prove to be less costly than Curtis’s lower-quality component. Harvey has sufficient capacity to supply all the carburetors needed and is asking for a long-term contract. With a five-year contract for 120,000 or more units, Harvey will sell the component for $60 per unit with a contractual provision for an annual product-specific inflationary adjustment. Jackson’s purchasing manager is intrigued by the offer and wonders if the higher-quality carburetor actually does cost less than the lower-quality Curtis carburetor. To help assess the cost effect of the two products, the following data were collected for quality-related activities and suppliers: I. Activity data: II. Supplier data: *The Quality Control Department indicates that sampling inspection for the Harvey component has been reduced because the reject rate is so low. Required: 1. Calculate the cost per component for each supplier, taking into consideration the costs of the quality-related activities and using the current prices and sales volume. Given this information, what do you think the purchasing manager ought to do? Explain. 2. Suppose the Quality Control Department estimates that the company loses $3,300,000 in sales per year because of the reputation effect of defective units attributable to failed components. What information would you like to have to assign this cost to each supplier? Suppose that you had to assign the cost of lost sales to each supplier using one of the drivers already listed. Which would you choose? Using this driver, calculate the change in the cost of the Curtis carburetor attributable to lost sales.

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Chapter
Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 11, Problem 10E
Textbook Problem
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Jackson, Inc., manufactures motorcycles. Jackson produces all the components necessary for the production of the cycles except for one (a carburetor). This component is purchased from two local suppliers: Harvey Parts and Curtis, Inc. Harvey sells the component for $64 per unit, while Curtis sells the same component for $57. Because of the lower price, Jackson purchases 75 percent of its components from Curtis. Jackson purchases the remaining 25 percent from Harvey to ensure an alternative source. The total annual demand is 160,000 carburetors.

Harvey’s sales manager is pushing Jackson to purchase more of its units, arguing that its component is of much higher quality and so should prove to be less costly than Curtis’s lower-quality component. Harvey has sufficient capacity to supply all the carburetors needed and is asking for a long-term contract. With a five-year contract for 120,000 or more units, Harvey will sell the component for $60 per unit with a contractual provision for an annual product-specific inflationary adjustment. Jackson’s purchasing manager is intrigued by the offer and wonders if the higher-quality carburetor actually does cost less than the lower-quality Curtis carburetor. To help assess the cost effect of the two products, the following data were collected for quality-related activities and suppliers:

  1. I. Activity data:

Chapter 11, Problem 10E, Jackson, Inc., manufactures motorcycles. Jackson produces all the components necessary for the , example  1

  1. II. Supplier data:

Chapter 11, Problem 10E, Jackson, Inc., manufactures motorcycles. Jackson produces all the components necessary for the , example  2

*The Quality Control Department indicates that sampling inspection for the Harvey component has been reduced because the reject rate is so low.

Required:

  1. 1. Calculate the cost per component for each supplier, taking into consideration the costs of the quality-related activities and using the current prices and sales volume. Given this information, what do you think the purchasing manager ought to do? Explain.
  2. 2. Suppose the Quality Control Department estimates that the company loses $3,300,000 in sales per year because of the reputation effect of defective units attributable to failed components. What information would you like to have to assign this cost to each supplier? Suppose that you had to assign the cost of lost sales to each supplier using one of the drivers already listed. Which would you choose? Using this driver, calculate the change in the cost of the Curtis carburetor attributable to lost sales.

1.

To determine

Calculate the cost per component from both the suppliers and provide information regarding the purchase manager to decide.

Explanation of Solution

Strategic cost management: Strategic cost management is the use of cost data to grow and recognize strategies that will maintain a sustainable competition.

Calculate the activity rates for assigning the cost to suppliers.

Cost for inspecting the carburetors per hour.

Inspecting the carburators=Cost for inspectingTotal sampling hours=$180,0004,500=$40 per sampling hour

Cost for expediting work per order.

Expediting work=Cost for expeditingTotal expediting order=$144,000300=$480 per order

Cost for reworking product per hour.

Reworking product=Cost for reworkingTotal rework hours=$1,026,0004,500=$228 per rework hour

Cost for warranty work per hour.

warranty work=Cost for warranty workTotal warranty hours=$1,800,0006,000=$300 per rework hour

Calculate the cost per component from both the suppliers

2.

To determine

Assign the lost sales cost to each supplier using any one of the drivers already listed and calculate the change in cost of the supplier C carburetor.

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Chapter 11 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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